January was bad for stocks, but Wall Street expects a better year

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“The Fed has really changed its tune over the past month,” said Kathy Bostjancic, chief U.S. financial economist at Oxford Economics. “He had communicated that inflation had been transitory, and now they fear that it is not and is more persistent.”

This left investors uneasy. That said, the link between January trading and the rest of the year has been weaker recently. Market declines in January are now quite common, including the previous two years, which nevertheless resulted in large annual gains.

Many Wall Street strategists are predicting that the market will end 2022 up. David Kostin, chief US stock market strategist at Goldman Sachs, for example, predicts the market will end the year up 15% from its Friday close. UBS’s chief equity strategist, Mark Haefele, said in a note to clients on Thursday that he’s also sticking to his year-end target: a 15% upside from Friday’s close. “We expect the equity rally to resume,” Haefele wrote in his note.

The market seems volatile, but its recent swings have been only slightly larger than usual. Over the past 60 years, the average high-low spread – the difference between the day’s high point and the day’s low point as measured by the market-tracking S&P 500 Index – has was 1.4%, said Howard Silverblatt, a senior analyst at S&P Dow Jones Indices. So far this year, that measure is 1.8%, about the same as in 2020, but well below the 3% average in 2008 at the height of the financial crisis.

The average investor has yet to be scared off. Bank of America wrote in a research note last week that its retail clients, as a group, invested more money in the stock market than they took out. In the first three weeks of the year, individuals with accounts at Bank of America bought $2.3 billion more in stocks than they sold.

At the same time, however, hedge funds that use Bank of America to trade sold nearly $3 billion more in stock and bond funds than they bought. “Retail customers remained the biggest buyers (as is typically the case in January),” Bank of America strategist Jill Carey Hall wrote in the note. “Customers bought the dip.”

One thing that supports optimism is that corporate profits have been steadily climbing. Analysts estimate fourth-quarter earnings rose 24% for S&P 500 companies from a year earlier, according to market data service FactSet. Earnings are expected to slow this year but rise another 9% in the first three months.

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